Bank bashing must continue until the too-big-to-fail banks crumble

Too–big-to-fail banks should be bashed continually until the weight of political discontent forces their breakup.

The bailouts of the too-big-too-fail banks irritated me (and many others). I would have far preferred to see the architects of the financial catastrophe of 2008 lose their jobs, their wealth, their social status, and be demonized for their atrocious behavior. Instead, we bailed them out, allowed them to keep their ill-gotten gains, and put them back in charge of our financial system. It wasn’t right.

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” — Andrew Jackson

Rather than killing the evil banks as Andrew Jackson did, we bailed them out. This flawed policy was sold to Americans as a necessary evil; ordinary people were “saved” by bailing out the 1%. Since there is no way to test alternate realities, we have no choice but to accept their contention.

Personally, I think they’re full of shit.

We had other policy options, including nationalizing the banking system. Sweden did it, and it worked. Iceland did it, and it worked. Our financial elites prevented this cleansing from occurring, and now the bad debts still reverberate through our financial system. We have banks propping up home prices through can-kicking loan modifications in an attempt to recover on their bad loans, and today’s homebuyers have to pay higher prices in order to bail them out. How does that help the little guy?

Realistically, the only way this situation changes is to keep the pressure on the financial elites. Ever since the passage of Dodd-Frank, the political left has been on the defensive. This is a mistake. The bank bashing must continue until the too-big-to-fail banks crumble to dust.

There is no argument that the banks, and the financial system more broadly, badly needed reform after the housing bubble burst. When millions of faulty mortgage loans defaulted, the system was brought to its knees. Without a taxpayer bailout, it would have collapsed, ensuring economic depression.

The most important reform has been to make it much more difficult to make bad loans. The subprime mortgage loans at the heart of the financial collapse are now all but impossible to make.

Reform also requires banks to hold a lot more capital – the financial cushion banks need to absorb the losses they suffer if loans they make default. Banks fail if their bad loans are greater than their capital.

Today, the banks have more capital than they have ever had, enough to withstand something much worse than the housing bust. Their capital cushion is also still growing, particularly for the biggest banks.

And regulators now have more tools to deal with troubled financial institutions that run out of capital. Regulators were unsure of how they should deal with failing institutions during the crisis. Or whether they even had the authority to deal with those that weren’t banks.

The fact that legislators made some progress — progress aggressively resisted by the banks — does nothing to warrant pardoning the banks for their bad behavior. The arguments he makes are disingenuous at best, dangerously foolish at worst.

Indeed, most of the financial institutions that faltered badly during the crisis weren’t banks at all. Lehman Bros. and Bear Stearns were more like hedge funds, Fannie Mae and Freddie Mac are behemoth mortgage companies, Countrywide was a nonbank mortgage lender, and AIG is an insurance company.

They all earned their special place in hell.

Is he really arguing the banks were any less evil?

At the behest of regulators, the nation’s biggest banks took over many of these failing institutions. The hope was that if the banks took them over, regulators, and by extension taxpayers, wouldn’t have to. Ironically, these banks are now getting bashed mostly for the bad lending by the institutions they took over.

The big banks were the good guys saving America, right?

Yes, the banks made plenty of mistakes, and reform was necessary, but it is time to stop the bank-bashing. It is counterproductive, as banks remain reticent to provide the credit the economy needs to perform well.

So the banks aren’t making more loans because the public keeps bashing them? Is he serious?

The banks aren’t making more loans because there aren’t many worthy customers, not because people bash them.

This is clearest with mortgage loans. Potential first-time home buyers, in particular, are having a tough time qualifying for a loan. First-timers generally have lower incomes and less for a down payment, and are more likely to stumble on their loan payments.

Yes, it is clear from the composition of the first-time homebuyer pool that not enough people have the character, capacity, and collateral to qualify for a loan. And what’s clear from the housing bubble and bust is that lenders shouldn’t provide loans to borrowers without character, capacity, and collateral.

Banks, nervous about getting hammered if they make a loan to someone who ultimately has a problem, have become overly cautious.

Many would-be home buyers who could make timely payments can’t get a loan. Yet housing – and thus the economy – won’t kick into full gear without more first-time home buying.

Back when banks used to lose money on bad loans, they were cautious about who they loaned money to. It wasn’t until the era of securitization that lenders abandoned sound underwriting in favor of volume. Obviously, Mark Zandi proposes going back to the lax standards of the bubble era when lenders weren’t responsible for the bad loans they make.

Bank-bashing also threatens to manifest itself in regulators requiring the banks to hold too much capital. Think of it this way: It makes sense to require that homes be built so they don’t get flooded more than once every hundred years, but it makes little sense to require that homes be built to withstand a thousand-year flood. That would be prohibitively costly.

The same principal applies to bank capital. We want banks to hold enough capital so that they could withstand a financial crisis like the one we just went through, but much more than that and it becomes too costly. Banks will charge onerously high interest rates and make it too difficult to get a loan.

So now Zandi is suggesting we stop pressuring regulators to apply reasonable capital ratio standards to financial institutions because it eats into their profits? Really?

Bullshit! We need to apply more pressure. The financial elites already circumvented the Dodd-Frank requirements for holding 5% risk retention on risky loans, so now they want to roll back capital requirements as well?

I give him credit for the courage to put such preposterous ideas into print. He should be embarrassed, but since Mark Zandi is wrong so often, most people will likely just ignore him.

Requiring the banks to hold too much capital also means that more credit will be provided by the shadow banking system. This part of the financial system is made up of a mélange of non-bank financial institutions and global investors.

There is nothing wrong with the shadow system per se, but as its name implies, what goes on in the shadow system can be opaque. Moreover, there is a lot more risk-taking in the shadow system and it is only lightly regulated. Parts of it are like the Wild West of the financial system, where almost anything goes and the regulatory sheriff can’t do much.

The banks have an overflow of capital and appear on safer financial ground, but the shadow system and thus the entire financial system probably isn’t.

So if we don’t let the banks be foolish and irresponsible, the money will simply flow to others who will be foolish and irresponsible? Really?

I guess we better let the too-big-to-fail banks do whatever they want.

Most bank-bashers also advocate breaking up the big banks with the goal of ending too-big-to-fail. That is, no bank should be so large that it would require taxpayer support if it faltered or the entire financial system would be at risk.

Yes, we do.

This is a laudable goal, but it should be considered against the potentially considerable benefits big banks provide. In a global economy, big banks supply the financial services required by large multinational corporations. Big banks also have the heft needed to make financial markets work efficiently. Stock, bond, foreign-exchange, and commodity prices would likely be more volatile without the liquidity big banks provide.

So we should keep the too-big-to-fail banks around — exposing taxpayers to enormous risks — because they somehow make financial markets more efficient?

It is also worth considering that in nearly all other countries, the financial system is dominated by a few too-big-to-fail financial institutions. These foreign institutions are already big players in our financial system, and could become bigger without the counterweight provided by large U.S. banks.

Since other countries allow this evil, we should too, right?

It is politically expedient to beat up on the big banks. That was perhaps understandable in the immediate aftermath of the financial crisis. It no longer is.

No. It’s even more understandable today. We haven’t rid the country of the evil of too-big-to-fail, and unless we keep the pressure on, the financial elites will destroy the wealth of another generation for their own personal gain.

22 responses to “Bank bashing must continue until the too-big-to-fail banks crumble”

Bad lending caused this

The national rate of homeownership in the first quarter of 2015 hit the lowest it’s been since 1993, which continues an ongoing decline in the rate, the Department of Commerce’s Census Bureau announced today.

The homeownership rate of 63.7% was 1.1 percentage points lower than the first quarter 2014 rate of 64.8% and a 0.3 percentage point drop from the fourth quarter of 2014.

“At 63.7% we’re now back to Q1-1993 levels and actually 63.7 was the low point for 1993,” Smoke says. “That level effectively means we have lost all of the gains from the Clinton-W Bush eras. At this level, we are essentially slightly lower than the average rate in the 1970s and 1980s as well. You have to go all the way back to the 1960s to see a lower rate that stuck.

“But the rate itself is a lagging indicator because it reflects the percent of households that are owners. So I think this number now more underscores what we’ve been through versus where we are going,” Smoke says. “In terms of where we have been, the rate bears witness to the fact that we have record levels of renters now, and for this decade, essentially all net new households have been renters.”

At the last Federal Reserve meeting, the Fed communicated that the economy has been slowing and the general consensus is that they would remain ‘patient’ and ‘data dependent’ regarding when they might raise interest rates. The general consensus is that interest rates will remain lower for longer.

Worldwide, country after country continues to struggle to create growth and inflation. So they have been resorting to devaluing their currency in an effort to make their products more attractive. As I’ve mentioned before, that results in importing deflation to the United States and makes U.S. companies less competitive relative to their foreign counterparts.

Slowing economies mean less investment in plant and equipment and less job security for those workers that still have jobs. Consumers are benefitting from lower energy prices, but a feeling of general economic uncertainty may keep many of them from making major purchases.

In the end, I don’t believe the actions of the Federal Reserve alone will be able to get our economy back on track. Structural reforms are also needed and the lack of them over the last several years is what has resulted in the malaise we are in. Until then, I anticipate average annual returns to be less than those experienced the last 5 years.

This Fed forecasting could really start to matter to me. There’s a strong possibility we could be under contract soon for a new house that would be completed in October – right after the September Fed meeting the consensus believes will result in a 25 bps increase. I’m really not interested in paying a full point to lock the rate for six months…

Your timing could become more complicated by potential rate volatility if there is another “taper tantrum.” I could see where you might start watching rates very closely.

IMO, if demand doesn’t pick up further (i.e. get closer to historic norms), then rates will likely remain low through the summer; however, if we get a very strong spring sales season, pressure on mortgage rates will force them higher.

Typical seasonal pattern

WASHINGTON (April 29, 2015) — Pending home sales in March continued their recent momentum, rising for the third straight month and remaining at their highest level since June 2013, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, climbed 1.1 percent to 108.6 in March from an upward revision of 107.4 in February and is now 11.1 percent above March 2014 (97.7). The index has now increased year-over-year for seven consecutive months and is at its highest level since June 2013 (109.4).

Lawrence Yun, NAR chief economist, says contract signings picked up in March as more buyers than usual entered this year’s competitive spring market. “Demand appears to be stronger in several parts of the country, especially in metro areas that have seen solid job gains and firmer economic growth over the past year,” he said. “While contract activity being up convincingly compared to a year ago is certainly good news, the increased number of traditional buyers who appear to be replacing investors paying in cash is even better news1. It indicates this year’s activity is being driven by more long-term homeowners.”

As expected from the NAr chief bullshitter, this year’s demand is being characterized as stronger than usual when the data doesn’t back his claim. 2014 was a particularly bad year, and while 2015’s sales are better, sales this year are not up to historic norms.

“Demand in many markets is far exceeding supply, and properties in March sold at a faster rate than any month since last summer2,” he said. “This in turn has pushed home prices to unhealthy levels — nearly four or more times above the pace of wage growth in some parts of the country. Simply put, housing inventory for new and existing homes needs to improve measurably to improve affordability.”

Disagrees with NAR pending sales

Mortgage applications decreased 2.3% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending April 24, 2015.

The Market Composite Index, a measure of mortgage loan application volume, decreased 2.3% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 2% compared with the previous week. The Refinance Index decreased 4% from the previous week.

The seasonally adjusted Purchase Index was unchanged from one week earlier. The unadjusted Purchase Index increased 1% compared with the previous week

Pumping market is a sign they may be selling

The CEO of the largest single private homeowner in the U.S. said that buying a home now is a “good investment” and that the recent gains the housing market has made are “good enough” for a buyer to invest in a home during a recent interview with CNBC.

Speaking from the Milken Institute Conference in Los Angeles, Blackstone Mortgage Trust CEO Steve Schwarzman told CNBC on Monday that the housing market has been “coming back for quite some time” even though inventory is low and prices have not increased as much. For example, Black Knight Financial Services reported earlier this week a year-over-year median price gain of 4.6 percent for single-family homes in February.

“We’re finding that that market continues to go up for the value of houses, although not at the same rate as it did, obviously, off the bottom,” Schwarzman said.

He seems to be missing a few “ifs” here. If you buy a house you can reasonably afford, if you suffer no serious financial setbacks, and if you remain in it for a decade or two, you will be in a better financial position than if you’d rented the equivalent house through that period.

Those are a lot of “ifs”. When people purchase a house they tend to consume more house than they need. It actually puts them in a worse financial situation than if they rented a small house that just meets their needs and invested their money in productive instead of a speculative “assets” (housing).

In the financial projections on this site, I put in a furnishing allowance to remind people that they will spend money on things when they buy a house. Often people forget or ignore this fact, then they rack up $20,000 or more in credit bills to get what they want.

Here are some things you’ve probably been hearing during the current bull market from a wide range of investors including some tongue-in-cheek translations about what they really mean.

On Fair Value:

Bears: We think the market’s fair value is much lower than current levels. (Translation: We have to say it’s way lower than the level where we called for a crash four years ago.)

Bulls: We think the market is fairly valued at current levels. (Translation: I have no idea what the fair value of the market is and neither does anyone else.)

Investment Strategists: If earnings grow at a consistent rate forever into the future and you slap a P/E ratio of 16x on the market we think stocks will rise 8-10% this year. (Translation: Stocks are up 3 out of every 4 years so if I keep predicting this I’m bound to be right eventually.)

Value Investors: The market is overvalued but our stocks are trading at a 30-40% discount to fair value.

Growth Investors: The monthly active user numbers are off the charts for this 3 person company that’s worth $50 billion.

On Market Gains:

Bears: It’s all artificial. (Translation: I didn’t participate.)

Bulls: We’re constructive from here and see a period of consolidation. (Translation: Please don’t fall, we’re all in).

On Sentiment:

Bears: Everyone is all in on the market. These people are delusional. No one sees the risks building up under the surface.

Bulls: Everyone is still bearish. Stocks climb the wall of worry.

On Interest Rates:

Everyone: Rates are going higher.

On Reading Material:

Bears: Did you read Hussman’s latest piece?

Bulls: Did you see what Siegel wrote today?

How it All Ends:

Bears: This will end badly (Translation: I will be gloating during the next bear market but will be too scared to buy).

Bulls: We predict a soft landing with a healthy correction that will make for a nice buying opportunity. (Translation: I will be too scared to buy during the next bear market.)

Private Equity: We have plenty of dry powder for the distressed opportunities that will arise from the next crisis. (Translation: All of that money will be used to shore up current investments that run into trouble.)

The solution is to break up the big banks into smaller pieces, then none of the pieces would be too big to fail. Unfortunately there is no constituency for this right now. Neither party is actively promoting it. It’s no accident that the big banks have truckloads of lawyers and lobbyists not only to prevent it from happening, but to prevent anyone from even talking about it seriously. I think back of that great Republican, Theodore Roosevelt, the trust-buster, who was not intimidated by the much greater wealth and power of the trusts in his day. How far we’ve come.

Based on her public comments, Elizabeth Warren is the only politician championing this issue. The financial elites own today’s Republican party, and they’ve donated so much to Hillary’s campaign that they own her too. Unless Elizabeth Warren gets the nomination then gets elected, too-big-too-fail will survive.

Most people can remember the small Countrywide branches in shopping centers all over SoCal. They were a popular place to deposit money because CFC paid a higher rate on CD’s than most other banks. They managed that because of the high rates of interest being charged on subprime/Alt-A mortgages. Calling CFC a non-bank lender is about as disingenuous as it gets.

In a statement, the bank said: “It is very important to remember that Countrywide Bank is well capitalized, with FDIC-insured deposits, and is one of the largest banks in the United States, with assets over $107 billion.”

He might be trying to get a PR job with a TBTF bank. I’d imagine they pay better than Moody’s Analytics and his political aspirations seem to have hit a brick wall after Mel Watt got the FHFA nomination.

I was a customer of Bank of America (& its predecessors) for decades, but in 2009 I closed all of our accounts there & went to a much smaller bank. Now our banking is done at that bank & at several credit unions. When asked, they told me they even kept a number of their mortgage loans on their books instead of securitizing them – we try to avoid ‘feeding the beast’ whenever possible.